Could Standardization Hurt the Green Bond Market?

As stock exchanges embrace green bonds, there’s debate over how sharply regulators and other players should define these offerings.


The Mexican Stock Exchange recently launched a green bonds segment out of hope and concern. The hope, says Eduardo Piquero, director of the exchange’s Mexico Carbon Platform, is that new reforms to the Mexican energy industry could help to boost investment in renewable-power projects. Such funding is vital because meeting the country’s green energy goals will cost $45 billion by 2024, most of it private capital.

The concern: Bond issuers may be tempted to take advantage of the related surge in investor enthusiasm for all things green. “We were worried some issuers could begin naming their bonds green without having a framework,” Mexico City–based Piquero explains. “We wanted at least to have the most important players in the market aware of what a green bond is and what the international practices are.”

The Mexican bourse is one of several stock exchanges that have thrown their weight behind the fast-growing green bonds market. But not everyone agrees that tighter specifications for these bonds is a good idea.

To trade on the Mexican Stock Exchange, green bonds must be deemed green by a certifier with experience in the market. So far, at least two issuers are working toward listing their bonds, Piquero says.

The London, Luxembourg, Oslo, Shanghai and Stockholm exchanges are among the others that have taken the plunge into green bonds, and the list will probably keep growing, with help from regulators. In January the Securities and Exchange Board of India unveiled its own green bond requirements; the National Stock Exchange of India is planning to add a green bond segment.

“These are big organizations, and they’ve got a high profile, so these are important developments,” says Sean Kidney, co-founder and CEO of the Climate Bonds Initiative (CBI), a London-based nonprofit that pushes for wider adoption of green bonds. “It’s an example of green bonds taking off.”

Green bonds have grown so explosively since the World Bank Group launched the first such paper in 2008 that it’s easy to forget how new they are. Total issuance now stands at roughly $135 billion, according to rating agency Moody’s Investors Service — an impressive number, even if it’s still a blip in the $150 trillion fixed-income market. After a hiccup in 2015, things are back in high gear: The $42 billion worth of green bonds issued worldwide in the first half of 2016 already surpasses the $41.8 billion tally for last year, the CBI reports.

That surge owes much to China, which saw about $12 billion in issuance during the first six months of the year. Last December the People’s Bank of China released green bond guidelines that include criteria for qualifying projects as green.

Steps by exchanges and regulators to define and standardize green bonds mirror a similar initiative by Moody’s; all of these efforts show a maturing market, Kidney says. The agency’s Green Bond Assessment, launched in March, scores bonds — on the issuer’s request — based on five key factors: organization, use of proceeds, disclosure on use of proceeds, management of proceeds, and ongoing reporting and disclosure.

Measures to define the bonds can go too far, argues Isabelle Laurent, London-based deputy treasurer and head of funding at the European Bank for Reconstruction and Development, an international financial institution that issues green bonds. Laurent is especially concerned that governments, like China’s, are calling the shots: “I think it’s a big mistake to say, ‘This is green,’ or ‘This isn’t green,’ because you’re killing the market before you start it.”

Although one investor might consider clean coal or nuclear power green, another might not, she notes. Laurent also points out that, with green bond demand outstripping supply, strict standards and regulation could deter issuers. “I think everything should be about transparency and not about increased standards,” she adds.

Laurent, who acknowledges that there’s some overlap between the two, supports the broad use of a voluntary set of standards like those laid out in the Green Bond Principles, drafted by Bank of America Merrill Lynch, Citigroup, Crédit Agricole Corporate and Investment Bank and JPMorgan Chase & Co. and updated each year by the Zurich-based International Capital Market Association.

The CBI’s Kidney thinks the green bond market still has room for consumer protections to ensure high-quality offerings. These safeguards will become even more important when the market expands beyond blue-chip bonds into the high-yield sector, he reckons.

“In China it’s a highly regulated market, and it’ll be the same way in India and Mexico as well,” Kidney says. “It should be whatever works best.”